The Internet of Things and the Future of Payment Systems

The Internet of Things and the Internet of Value create a bridge toward the future of payment systems. Image: Shutterstock

“Nearly everywhere today, headlines proclaim that an Internet of Things is upon us. But what is this digital transformation, and where is it leading us?”

That is the question asked by Jessie Cheng, vice chair of the Payments Subcommittee of the American Bar Association’s Uniform Commercial Code Committee. Cheng is also deputy general counsel at Ripple, with previous experience in the legal group at the Federal Reserve Bank of New York.

In a chapter of an upcoming ABA publication, Electronic Payments in the 21st Century, Cheng outlines the transformative potential of the Internet of Things (IoT) and its ramifications regarding identity, access control, privacy and security, among other legal and policy considerations.

Her main takeaway in the chapter is that the IoT cannot be fully realized unless the limitations of today’s payment networks are addressed. Smart devices, such as the Apple Watch or Google Glass, can make the shopping experience more convenient for the consumer, but they rely on traditional methods of payments (i.e. a bank account or credit card). But those payment rails are fragmented and inefficient. And what if you don’t even have access to those payment methods?

The Internet of Things cannot expand access to underdeveloped regions around the world without a modern payments infrastructure that is interoperable and efficient. It also cannot scale to service and interoperate what experts project will be an addition of $15 trillion to the global GDP in the next 20 years using current payments infrastructure. The IoT solves for communication between physical objects, but it needs to come with a “built-in streamlined exchange of value” in order to grow the global economy.

Cheng discusses how the financial technology industry is already making strides toward this Internet of Value, and cites the Interledger Protocol, developed by Ripple, as the beginning of an era in which money moves as seamlessly as information does online today:

“Until the Internet of Value arrives, the smart objects of the Internet of Things must be cobbled together with today’s traditional payment rails, and the chain will only be as strong as the weakest link.”